Rising Food_ Oil Prices Pose

Rising Food, Oil Prices Pose
Challenges for Developing World
By TOM BARKLEY
July 2, 2008; Page A8
The jump in oil and food prices has put leaders of some developing countries in the
difficult position of balancing the interests of the poor and economic growth, the
managing director of the International Monetary Fund said Tuesday.
"If food prices rise further and oil prices just
stay the same, then some governments will be
unable to feed people and at the same time to
maintain the stability of their economy,"
Dominique Strauss-Kahn said at a news
conference to discuss a new IMF report on the
impact on developing countries of a doubling
in commodity prices since 2006.
While advanced countries are also dealing with
Getty Images the rising price pressures, the challenges are
International Monetary Fund Managing Director much greater for developing countries, which
Dominique Strauss-Kahn spoke on worldwide
increases in food and fuel prices in Washington. had been making strides in recent years in
improving economic stability and reducing
poverty, he said.
"The picture is a picture of a world in crisis," said Mr. Strauss-Kahn, noting that global
financial markets are still enmeshed in the turmoil that began in the U.S. subprime
mortgage market. Policy responses are needed from governments as well as the
international community, he said.
Leaders from the Group of Eight leading nations have put the commodity-price crisis on
the agenda for next week's meeting in Japan. Mark Plant, deputy director of the IMF's
policy development and review department, said at the news conference that the G8
should work toward concluding the Doha round of global trade talks, ensuring adequate
investment in agriculture in developing countries and addressing the diversion of crops
toward biofuels.
In its first broad-based analysis of how rising commodity prices are affecting developing
countries, the IMF found an increasing deterioration in inflation conditions and the
balance of payments. And with oil and food prices expected to ease only gradually, the
situation could worsen if governments don't take appropriate action, it said.
"The food and fuel price surges have greatly raised the policy challenges associated with
reducing poverty, ensuring food security, and maintaining macroeconomic stability," the
IMF said in the report, covering about 150 countries. The world is "in the midst of the
broadest and most buoyant commodity price boom since the early 1970s," it said.
The IMF cited the rapid growth of emerging and developing countries as the
"main source" of demand for commodities. The fund said rising demand and a
"sluggish" supply response has been the main driver behind the run-up in oil
prices. Financial conditions, such as the weak dollar and low real interest rates,
have also likely contributed, it said. The IMF found "no compelling evidence"
that commodity trading has affected price trends.
The rise in oil prices has fed into food costs, including the increase in biofuel
production, the fund said, noting that corn-based ethanol output accounted for
about three-quarters of the increase in global corn consumption in 2006-07.
More recently, a growing number of countries have imposed limits on food exports,
exacerbating the global problem, it said.
The fund found that inflation pressures have built up more than expected since the
beginning of the year in developing countries, whose fiscal and balance-of-payment
conditions have also worsened. It estimated that a further 20% increase in the price of
commodities from its April projections -- which has already occurred in the case of oil --
could "severely weaken the external position" of 72 countries.
The IMF said developed countries should re-examine support programs for biofuel
production and lift limits on agriculture exports. For developing countries, the IMF
recommends allowing price increases to pass through to the economy to avoid disrupting
macroeconomic stability, while offering programs to help the most vulnerable of their
populations.
Energy Watchdog Expects
Oil Markets to Stay Tight
Supply Constraints
Likely to Persist
As Demand Rises
By GUY CHAZAN in Madrid and NATALIE OBIKO PEARSON in London
July 2, 2008; Page A8
Global oil markets will remain tight over the next five years, the International Energy
Agency warned Tuesday, in a gloomy assessment that offered little respite for consumers
battered by record-high oil prices.
The view of the Paris-based energy watchdog, which is funded by the world's biggest oil-
consuming nations, helped push oil prices to near-record levels. Benchmark crude oil
rose 97 cents a barrel, or 0.7%, to settle at $140.97 Tuesday in New York, a Nymex
closing record. U.S. oil futures set a new intraday high of $143.67 a barrel early Monday.
The IEA forecast global oil supply capacity will
rise to just 96.2 million barrels a day in 2013
from 90.4 million barrels a day this year,
including crude production from the
Organization of Petroleum Exporting Countries,
OPEC natural gas liquids and non-OPEC
production.
Most of that growth will come early before
sharply tapering off. Between 2011 and 2013,
capacity will grow by less than one million
barrels a day annually, the IEA said.
The IEA's outlook jibed with the views of oil
company executives at an industry conference in
Madrid, who said the red-hot oil market reflects deep-seated pessimism about the
industry's ability to open the spigot to satisfy rising demand.
Christophe de Margerie, head of French energy giant Total SA, said there was enough oil
available, but confidence was lacking that "the system will deliver oil in the future --
knowing that to deliver new oil and gas will take 8 to 10 years."
The IEA's report provided scant comfort for a world desperate for relief from the
escalating cost of fuel. The oil shock is already badly denting the global economy, with
consumers restricting their travel, truck drivers and fishermen striking in Europe and
airlines reducing routes or closing down altogether. Saudi Arabia tried to cool the
markets by adding 200,000 barrels a day of production last month, but prices continued to
climb.
The IEA said it expected crude producers to boost supply in response to an oil price that
has doubled since the last medium-term oil market report, issued a year ago. But that
hasn't happened. Demand for fuel was still strong in developing countries, and that,
combined with supply constraints, "continue[s] to paint a tight market picture," the
agency said.
"What we're seeing here is an absence of obvious reactions to price signals," said
Lawrence Eagles, editor of the IEA report. He noted that it takes time for the impact of
prices to filter through, especially on the supply side, where "things move much, much
more slowly."
Perhaps one of the most disappointing figures to emerge from the IEA report was its
assessment of oil production by nations outside the OPEC cartel. Non-OPEC supply was
"paltry to say the least," said Mr. Eagles, the IEA's head of market analysis, and had been
revised down since last year's market report. He said crude supply from non-OPEC
countries would remain at or below 39 million barrels per day over the next five years,
though it would rise after 2013.
That is sobering news for a world that has come to rely heavily on non-OPEC oil in
recent years. A massive boost in Russian crude output earlier this decade helped slake the
big surge in demand from China and India as their turbocharged economies took off. But
the Russian engine has stalled, with some fearing production could even decline this year.
Meanwhile, output has long been falling at traditional non-OPEC sources like the North
Sea and Mexico.
OPEC spare capacity, though rising over the next couple of years, will fall "to negligible
levels" in 2013, the report said. That is bad news because low spare capacity reduces the
market's ability to respond to sudden increases in demand.
Chakib Khelil, the Algerian minister of energy and mines and the president of OPEC,
tried to counter the view that OPEC wasn't doing enough to slake the world's thirst for
oil. He told the Madrid gathering that OPEC was collectively investing $150 billion in
new projects that would boost production capacity by four million barrels a day by 2012.
Mr. de Margerie said oil output would reach a plateau of 95 million barrels per day by
2015. Even that, he said, would be a "beautiful success," because of the need to offset
declines at mature fields as well. "It will not go smoothly...to 95," he said.
The IEA also said that a 4.7% increase in China's electricity prices for business and
industrial users, effective Tuesday, isn't enough to prevent power shortages that are
adding to the country's oil demand. China's power generators aren't likely to be profitable
as a result of the price increase -- the first in two years -- as they can't pass on rising coal
costs to the consumer in full. Coal prices in China have risen more than 60% this year,
forcing the government to reintroduce price controls on spot coal sales.
Many generators have opted to temporarily close capacity rather than sustain losses on
output, exacerbating power shortages at a time when transport bottlenecks and the closure
of small mines are restricting coal supplies.
Such policy decisions will keep having significant implications for oil demand, the IEA
said, with blackouts in southeastern China and elsewhere triggering a spike in demand for
diesel to fuel backup generators.